What interest rate changes mean for business?

When the Bank of England cut interest rates for the first time in four years, the media had much to say about it.

Regardless of whether they increase or reduce, interest rates impact us and our businesses. But how exactly? Let’s take a look.

What are interest rates?

Interest rates are set by the Bank of England (BoE) and affect two main areas for businesses:

1. The cost of borrowing money
2. The reward for saving money

In practice, this means that when you take out a loan, the interest rate determines how much extra you pay back on top of the initial amount you borrowed. Equally, the base interest rate determines how much extra money the bank will pay you for keeping your savings with them.

As the UK’s central bank, the BoE is independent of the Westminster government and acts as a caretaker of the country’s economy. Its Monetary Policy Committee meets every few weeks and can decide to raise or lower the interest rate in order to help stimulate the economy, control inflation and protect borrowers and savers.

When the BoE adjusts the base interest rate, it trickles down and influences the rates banks and other lenders charge. This ripples through the economy and affects everything from personal loans and mortgages to business financing.

Why do interest rates change?

Interest rates can be changed for several reasons, but economists primarily use them to control inflation and stimulate economic growth.

When the economy is sluggish, lowering interest rates can encourage borrowing and spending, helping boost economic activity. By that measure, raising interest rates when the economy starts overheating can help cool things down by making borrowing more expensive (and saving more attractive).

Interest rates and the day-to-day running of your business

How do interest rates affect business loans?

The base interest rate often determines the difficulty of accessing credit, with lower periods being when banks are more willing to lend money and easier to get loans.

Lower interest rates typically mean lower monthly repayments, which can ease financial pressure and free up cash for other business needs. Whereas higher interest rates mean the opposite, making expansion and investment feel a little more restrictive.

If you need to take out a loan to expand your business, buy new equipment, or manage cash flow, you’ll find that loans are now more affordable following an interest rate cut.

Interest rates and refinancing opportunities

Thinking about refinancing? The base interest rate will also have an impact on that too.

When interest rates are lowered, businesses might see an opportunity to refinance and switch to a loan with a lower interest rate. It can reduce your monthly repayments and improve your cash flow.

Got an existing loan? Variable-rate loans adjust with changes in the base rate, so depending on whether the rate rises or falls, so too will your repayments.

Investment and growth

Interest rate changes might determine the ability to grow your business.

Whether you’re planning to expand your product line, open new locations or invest in new technology, the cost of financing can make these initiatives more achievable, thanks to the base rate of interest.

When rates are higher, we’re more inclined to tighten our purse strings, which can have a knock-on effect on expansion, recruitment, development and training among existing staff members.

Whereas when rates are lower, and therefore the cost of borrowing is smaller, you might find it easier to invest in growth opportunities.

Do interest rates affect consumer spending?

In theory, yes. Economists assume that consumers are more likely to borrow and spend more of their own money when interest rates are lower.

This can translate to increased sales for your business, especially if you operate in retail, hospitality or other consumer-facing industries.

Put simply, when your customers and clients have more disposable income in their pockets, they’re more likely to spend it (hopefully) with you.

Future-proofing your business finances

These are some things you might consider every time the base interest rates change.

• Review what you need — assess your current loans and consider if refinancing could save you money. When rates drop, it’s a time to look at potential investment opportunities that could now be more viable.
• Monitor your cash flow — when things like loan repayments fluctuate, have a plan for finding or saving that extra income.
• Stay Informed — keep an eye on economic updates to stay ahead of potential impacts on your business.

Interest changes have pros and cons

Interest rate changes bring both drawbacks and benefits to your business.From cheaper loans and increased consumer spending to increased interest on your income from savings.

Understanding these changes and knowing how to plan your finances accordingly can help you optimise business opportunities or bolster your finances during difficult times.

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